Investors are rapidly divesting from emerging market equities as they brace for President-elect Donald Trump’s proposed trade tariffs and grapple with a strengthening US dollar and rising bond yields, according to a report by the Financial Times (FT).
The MSCI Emerging Markets Index, which tracks approximately $7.6 trillion worth of stocks in China, India, Brazil, South Africa, and other markets, has fallen more than 10% since reaching a two-and-a-half-year high on October 2. During the same period, developed market stocks have remained relatively stable.
Emerging markets have been particularly impacted by forecasts suggesting that inflationary policies under the Trump administration, such as tariffs and tax cuts, will compel the Federal Reserve to maintain higher interest rates for longer than previously anticipated. This comes amid an already robust US economy.
In recent weeks, US government bond yields have risen as investors reassess the inflation outlook. Emre Akçakmak, a portfolio advisor at East Capital, an emerging markets fund manager, noted, “With US yields rising and the US dollar strengthening, it’s clear that this is not an environment conducive to emerging market performance. The major markets that constitute two-thirds of the MSCI index are all under pressure.”
Chinese stocks, which represent the largest share of the index, have declined by 15% since October 2 due to concerns about the resilience of the country’s economy. Similarly, India and South Korea, two other major players in emerging markets, have also suffered significant losses in recent months.
According to JPMorgan data, investors have withdrawn approximately 3 billion dollars from global emerging market equity funds this year. This adds to the 31 billion dollars in outflows recorded in the previous year.
Prolonged periods of high US interest rates and a strong dollar often discourage US investors from taking on additional risks by investing abroad, prompting them to focus on domestic opportunities instead.
Many investors anticipate that countries affected by US tariffs may attempt to weaken their currencies to enhance the competitiveness of their exports, which could further reduce dollar earnings in emerging markets.
Some investors are positioning for a potential sell-off in emerging market assets during the first half of the year, followed by a recovery. They argue that tariffs may initially be set higher than Wall Street’s consensus but could be reduced as Trump negotiates deals with individual countries.
However, some remain hesitant to return to emerging markets, as doing so would require significant exposure to Chinese equities unless they are held outside of indices that could overshadow movements in other countries.
